In a nutshell:

• Economic growth is expected to continue at the same slow pace.
• Revised General Fund and School Aid Fund projections increase state revenues by about $500 million over the next two years; a 1 percent increase.
• Attention turns to the legislature as the budget nears completion.

 
As the legislature completes its work on the budget for next fiscal year, the state got some good news for revenues moving forward. While the economic recovery from the Great Recession has been slow, with many still feeling the effects, the current economic expansion has become the second-longest in U.S. history. That growth is expected to continue over the next few years, which is driving rosier state revenue projections.

Economy keeps chugging along

The House Fiscal Agency, Senate Fiscal Agency, and Department of Treasury met on Wednesday this week for the second Consensus Revenue Estimating Conference (CREC) of this budget cycle. The CREC brings the three primary state fiscal organizations together to establish a mutually agreed upon economic forecast for the state and project state revenues for the next few years.
 
The CREC projects slow but steady growth to continue over the next few years. Unemployment is expected to continue decline until it stabilizes around pre-recession levels, U.S. GDP is expected to grow by about 2 percent annually, and wages are expected to grow as well (albeit at a slower rate). Many have bemoaned the slow pace of the recovery as the share of employed people in the state (see Chart 1) still has not reached 2000 levels (before Michigan’s single-state recession and the Great Recession), and state income growth is relatively low.
 
While the strength of the recovery has seemed lackluster, the length of the recovery has allowed the state to come close to previous economic levels. Expansions have averaged 39 months prior to the current cycle; this expansion has lasted 93 months – close to eight years. Despite the length of the current national recovery, a recession does not seem imminent. The fiscal agencies all project the economy to continue to grow for at least the next three years (although economic contractions are very difficult to predict ahead of time).
 
Chart 1
Michigan Employment, 2000-2018

Additional one-time money

The continued growth brings good news for the state’s General Fund, for which tax revenues still lag behind 2000 levels. The consensus estimate increased revenue projections beyond those estimated at the January CREC for each of the next three years, adding a much needed cushion to the General Fund. The revised projections add a little more than $300 million in revenue over the next three years (see Table 1) due in part to higher than previously expected growth in income tax revenues. The School Aid Fund saw similar increases; revisions over the next three years total about $350 million in additional revenue.
 
Table 1
CREC revenue updates – May Increases from January projections
 

 
While the extra money for FY2020 gets folded into the next round of budget negotiations, the surplus for the current year can be distributed through a supplemental budget, and the FY2019 revenues will be added to the budget discussion for the current year. This adds $270 million in revenues for the School Aid Fund, and an additional $228 million in General Fund revenue for the legislature to work with.

Spend, save, or cut taxes?

That leaves a question of what to do with the windfall. Several ideas are already in play. Some have suggested putting the money away in the Rainy Day Fund, which is at a peak for recent years but is still unlikely to survive through a recession. Even though the state is not expected to enter a recession soon, and because this new money should be considered one-time revenues, storing that money away could be fiscally prudent, given the challenges the state is facing.
 
Many have thrown in the idea of putting the additional expected funding toward road improvements. The state already made a $175 million supplemental appropriation to jump start road improvements earlier this year, and additional increases from one-time sources can move the needle on catching up with poor road conditions. The potential drawback is that increases might not be distributed as needed. Other ideas, including additional money for school safety programs and lowering state debt, have also been discussed, but it is yet to be seen what the legislature will do with the money.
 
These ideas all fall under the realm of good one-time spending uses; they would not require additional funding for years down the road. Some might think this surplus could allow for a modest tax cut; but because these are one-time revenue adjustments, adding a long-term commitment like reducing the Personal Income Tax rate could have far-reaching consequences on the state budget.